Legislation passed earlier this year to jump-start the economy includes a tax incentive for new car purchases that you should be aware of before the New Year arrives, according to Laurie Asch, Senior Tax Analyst for the Tax & Accounting business of Thomson Reuters.

You can use this expiring tax break, and various tax credits – including two new ones for two new for 2009 — for purchases of new energy-saving cars, to lessen your sticker shock. Consider:

Free ride on sales tax. If you buy a new car, SUV, or light truck by year-end, you can deduct the state or local sales or excise taxes paid on up to $49,500 of the purchase price.

“You will get the deduction whether you itemize or claim the standard deduction, and it’s allowed for alternative minimum tax (AMT) purposes,” says Asch. “You may also claim the deduction for more than one car. For example, for a married couple whether filing jointly or separately, each spouse can deduct the taxes for his or her own new car.”

However, the deduction phases out if your modified adjusted gross income (MAGI) is between $125,000 and $135,000 (between $250,000 and $260,000 on a joint return).

“You do not have to use the car for business, and it doesn’t have to be an energy saver,” says Asch.

You must buy the car by Dec. 31, 2009, before Congress puts on the brakes. One other potential road block — you cannot take this deduction next April if you elect to deduct state and local sales taxes in lieu of state and local income taxes.

Green light for credits. In addition to the above deduction, if your new car is an energy saver and is certified as meeting applicable environmental requirements, you may be entitled to one of the credits described below, which apply for both regular tax and AMT purposes. (Unlike a deduction, a credit reduces your tax dollar-for-dollar.)

You do not have to use the car for business, but it must be used predominantly in the U.S.

Tax Tips!

For certain credits, the amount allowed for a particular manufacturer’s cars phases out after a set number of its vehicles is sold. So, even if your new car otherwise qualifies, you may not get the full credit. Ask your dealer, or go to IRS’s Web site (www.irs.gov), to find out what you can claim for your new car.